From the course: Structuring a Construction Loan
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Understanding the capital stack in construction
From the course: Structuring a Construction Loan
Understanding the capital stack in construction
- [Narrator] Before we wrap things up and come to some conclusion, let's touch on a couple of other concepts, specifically mezzanine debt and promote structures. In construction finance fundamentals, we discussed the capital stack and suggested that sometimes developers want to get a higher loan to cost to minimize the equity, and they do this via the mezzanine market. Mezzanine debt will typically be available at a much higher rate than the senior debt and is not usually secured, and certainly takes a backseat position to the senior debt, if there is any security provided on this debt. With mezzanine debt, the developer likely does not have to give up any equity in the deal. Keep this concept in mind when we address promote structures. From a funding perspective, all the equity goes in, then the mezzanine and then the senior debt. Then when proceeds come in, the senior debt is paid off, and then the mezzanine and then the equity, including any promotes or profit sharing.
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